Pension & Benefits News Income tax, withholding, and reporting rules apply to year of receipt of uncashed retirement distribution checks
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Monday, September 9, 2019

Income tax, withholding, and reporting rules apply to year of receipt of uncashed retirement distribution checks

By Pension and Benefits Editorial Staff

The IRS has ruled that an individual who receives a retirement distribution check from a qualified plan is taxed in the year of receipt even if the check is not cashed. In addition, the employer’s obligation to withhold tax and report the distribution is unaffected by whether the check is cashed.

Background. An employer, as plan administrator of a qualified retirement plans (that does not include a qualified Roth contribution program under Code Sec. 402A(b)), is required to make a plan distribution of $900 to a participant in 2019. The participant has no investment in the contract within the meaning of Code Sec. 72 with respect to her plan benefits, has a calendar year taxable year, and has never made a withholding election concerning her plan benefits. The employer makes the required $900 distribution, a designated distribution within the meaning of Code Sec. 3405(e)(1), by withholding tax as required under Code Sec. 3405(d)(2) and mailing a check for the remainder to the participant. Although the participant receives the check and could cash it in 2019, she does not do so. She does not make a rollover contribution of any portion of the designated distribution, and no other exception to income inclusion under Code Sec. 402(a) applies.

Clear rules for checks not cashed in year of receipt. Because the participant has no investment in the contract within the meaning of Code Sec. 72 and no exception to Code Sec. 402(a) applies, the amount of the designated distribution is includible in her gross income in 2019. The participant’s failure to cash the distribution check she received in 2019 does not permit her to exclude the amount of the designated distribution from her gross income in that year under Code Sec. 402(a). According to the IRS, this rule applies whether or not the individual keeps the check, sends it back, destroys it, or cashes it in a later tax year. Note that the new rule does not apply unless the individual “could cash” it in the year of receipt.

For qualified retirement plans, Code Sec. 3405(d)(2) provides that the plan administrator must withhold, and is liable for payment of the tax required to be withheld, under Code Sec. 3405 unless the plan administrator directs a payor to withhold the tax and provides the payor with certain required information. Under the facts presented, the employer, as the plan administrator, withheld tax as required under Code Sec. 3405(d)(2) from the participant’s designated distribution. The participant’s failure to cash the distribution check she received does not alter the employer’s obligations with respect to withholding of tax, and liability for payment of that tax, under Code Sec. 3405, according to the IRS.

Form 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) is used by the employer maintaining a plan or the plan administrator to satisfy the reporting obligations under Code Sec. 6047(d). Under the 2019 instructions to Form 1099-R, a Form 1099-R must be filed for each person to whom a designated distribution of $10 or more has been made, and the total amount of the distribution (before income tax or other withholding) must be reported in Box 1. In addition, under those instructions, the taxable amount of the distribution (including income tax withheld) must be reported in Box 2a, and the federal income tax withheld must be reported in Box 4.

Because, under the facts presented, the plan distribution to the participant, including both the amount of the check and the amount withheld, is a designated distribution under Code Sec. 3405(e)(1) that exceeds the reporting threshold, the employer is required to report that designated distribution in Box 1 of a Form 1099-R for 2019. Since the participant has no investment in the contract within the meaning of Code Sec. 72 and no exception to income inclusion under Code Sec. 402(a) applies, the employer must report the same amount in Box 2a as in Box 1 and must report the federal income tax withheld in Box 4. The participant’s failure to cash the distribution check she received does not alter the employer’s reporting obligations under Code Sec. 6047(d).

SOURCE: IRS Rev. Rul. 2019-19.

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